Since the start of the pandemic, various restrictions have been placed upon the recovery of rent arrears, all of which are due to expire in March 2022.
The new Bill sets in motion a new method of dealing with rent arrears where ring-fenced arrears claims are subject to a moratorium (pause on enforcement) while the parties engage in arbitration.
What is covered by the Bill?
The tenancy or lease must be a business tenancy, and this is not likely to include licences to occupy or short-term tenancies at will (thought this is yet to be made clear).
The arrears must be ‘protected rent debt’. Rent means payment for use of the property and will also include VAT, service charge and interest on those sums. To be ‘protected rent debt’ the debt must have been incurred during a mandated government closure. If the business was never mandated to close, the arrears will not be governed by the new Bill.
There is a helpful chart at Annex A of the Code of Practice which shows when certain businesses were mandated to close.
What is the code of practice and how does that align with the new rules?
The Code of practice for commercial property relationships following the COVID-19 pandemic contains guidance which will be used by the arbitrators when making their determination.
What is a moratorium and how will it work?
A moratorium is a legal ‘pause’ on any court or other enforcement action. When a claim for rent arrears is issued, either party can apply to the court for a moratorium – and the court must grant it. During this time, either party can refer the case to arbitration.
How long with the moratorium last?
Six months, unless the matter is referred to arbitration in which case the moratorium will be lifted when the arbitration process completes.
What happens during the moratorium?
The case may be arbitrated (either party can apply). If neither party applies, the case will simply be paused for 6 months. The landlord will be unable to take any action during this time – including CRAR (commercial rent arrears recovery – using bailiffs), forfeiture (ending the lease for non-payment), insolvency (winding up petitions or bankruptcy) and drawing from any rent deposit deed.
What should I do first?
As a landlord, you should first consider how much of the arrears are ‘protected rent debt’ (see above) by considering the dates of the rent arrears alongside the mandated closures. You should then also begin pulling together financial information to be used in the arbitration process – such as the debts and assets of the tenant, your own financial information to show how the arrears have impacted you – as well as your attempts to settle the arrears. Information on the viability of the tenant business (COVID aside) can be especially useful. See below for what the arbitrators will take into account.
How does arbitration start?
It starts by either party notifying the other that it wishes to arbitrate. This notification must be accompanied by a proposal to settle the matter. If there is no response, then the initiator can refer the matter to arbitration after 28 days. If there is a response (which is due 14 days after notification) then the initiator must wait 14 days after the response before referring the matter to arbitration.
Can I try to settle before and during the arbitration process?
Any revised offers should be put within 28 days of the initial proposals and be accompanied by supporting evidence. The process will work like any other arbitration so if a settlement is reached during the process, the parties could invite the arbitrator to stand down.
Who will the arbitrator be?
A registry of arbitrators is being set up. It is likely they will be accountants or surveyors.
Who will pay the arbitrator?
Each party will pay half of the arbitrator’s fees and cover their own legal costs of the process.
What will the arbitrator take into account?
The task of the arbitrator is to determine whether the tenant should pay the protected rent debt. In doing so, the arbitrator must have regard to certain principles as contained in the Code of Practice. To summarise, these principles conclude that the arbitrator’s decision should be aimed at preserving the tenant’s business – as long as that is not at the total expense of the solvency of the landlord.
What powers does the arbitrator have?
The arbitrator can decide to write off some or all of the protected debt. He or she can also allow the tenant to pay in installments (for a period of up to 2 years) and freeze or reduce interest charges.
If the arbitrator finds that the tenant’s business is no longer viable, and would not be viable even if the debt were written off, then it must dismiss the reference to arbitration – whereupon the court can pick the matter back up.
What is the significance of proposals made before the arbitration?
The proposals made are very important because if the arbitrator find that one party has submitted a proposal which is consistent with the principles and the other is not, it must side with the party who made the consistent proposal.
How do I treat payments of rent during this process?
Where there are a mix of protected and non-protected arrears, you must use any payments towards the non-protected debts first.
What about pending claims?
Any court proceedings brought before 10 November will not be subject to the moratorium. The parties can still refer the matter to arbitration though if they wish, even if judgment has been entered on the debt, though there is no obligation to do so.